Finding replacements for CEO Bob Nardelli (l) and President Tom LaSorda (r) will be among the challenges facing Chrysler's new board.
And now what?
In his news conference, on Thursday, President Barack Obama suggested that despite forcing Chrysler LLC into bankruptcy, the company’s future is bright. “The necessary steps have been taken to give one of America’s most storied companies a new lease on life,” he declared.
But in a separate background briefing, top White House officials tempered their optimism with the recognition that this is all uncharted territory. There’s absolutely no way to guarantee that things will go smoothly in bankruptcy court.
Recalcitrant lenders aren’t the only ones who might try to derail what one senior official described as a “surgical” process meant to be completed in 30 to 60 days. Dealers, whose ranks could be trimmed by two-thirds, from 3600 to less than 2400, might also resist a rapid emergence from bankruptcy.
And with Chrysler shutting down its entire assembly network until then, even surviving dealers could wind up short of product, further weakening the automaker’s balance sheet.
Okay, so let’s play a what-if game that predicts things do go reasonably smoothly in that New York City courtroom. Then what? That’s the big unknown.
“Lots of things could run this off the rails,” said analyst Jim Hall, of 2953 Analytics.
There’s the economy, of course. A growing number of headlines, in recent days, have begun suggesting things have bottomed out and may finally be on the upswing. Certainly, there’s been nervous signs of that on Wall Street, with the Dow up roughly 25% since its early-March trough. But as analyst Hall cautions, deep recessions are known to see “a bear uptick” even before things hit bottom. And if U.S. auto sales fall even further from the already dismal levels of the first quarter – a run rate of less than 10 million new vehicles annually – all bets are off when it comes to Chrysler’s latest viability plan, and any other auto company’s plan in the U.S. for that matter.
Even if the economy is on the mend, the automaker has a lot of work ahead of it. There’s the issue of management, with CEO Bob Nardelli and Vice Chairman Tom LaSorda both expected to leave as soon as, or in LaSorda’s case before, Chrysler emerges from bankruptcy. Though the White House has made it clear it doesn’t want to play an active role in day-to-day management, it will attempt to strongly influence their replacement, as well as the choice of new board members.
Then there’s the United Auto Workers Union. It will hold a 55% stake, at least initially in the VEBA, but it’s not clear if they will be able to out-vote everyone. It depends on a new goverenance structure. But the UAW is in conciliatory mode. As TheDetroitBureau.com reported, earlier this week, it’s even agreed to a no-strike clause the Treasury Department insisted it insert in Chrysler workers’ new contract. But that doesn’t mean the union will simply bow to everyone else’s demands.
You can be sure that Fiat will demand a strong, if not controlling voice. The Italian automaker, which will start out with a 20% stake in the new Chrysler, and potentially end up with 35%, depending on whether it can meet three specific goals:
It will get an additional 5% stake for helping Chrysler establish an effective global distribution network. That’s crucial, as the company is currently over-dependent upon the ups-and-downs of the North American market, while its competitors can both increase their economies of scale and offset normal economic ups-and-downs by selling into counter-cyclical and emerging markets, like China;
Fiat will get another 5% for setting up a North American production base for an all-new, fuel-efficient powertrain;
That would crucial in obtaining the final 5% for helping Chrysler develop and produce a new line of high-mileage products in North American assembly plants. But here another problem rears up.
Turn on the TV news channels or read mainstream publications and you’ll frequently find talking heads asserting that Chrysler would never have been in so much trouble “if it only” switched from pickups, SUVs and other light trucks to small, fuel-efficient passenger cars. Or would it?
“Americans don’t like small cars,” asserted analyst Hall, and the latest numbers back him up. While Toyota saw sales of its Prius hybrid-electric vehicle surge to more than 20,000, in June 2008, during the peak of last year’s fuel price run-up, volumes plunged to barely 6,000 a month, during the first quarter of 2009. And other HEVs haven’t done much better, nor have conventionally-powered small cars, such as the Nissan Versa and Honda Fit. On the other hand, light truck sales have posed something of a rally.
Yes, fuel prices will likely go up again, and Americans may yet swallow hard and make the move to smaller vehicles. But the real winner is likely not to just have new microcars, but also an array of larger cars and trucks that deliver the sort of mileage long sought impossible. Consider the way some large, diesel-powered SUVs are nudging 30 miles per gallon, and even full-sized hybrid pickups are pushing 20 mpg.
For the last three decades, Washington has turned a blind eye to market realities and simply laid out numeric targets for automakers to meet, objectives especially difficult for full-line makers, like those in Detroit. That of course changes under the new fuel economy regulations based on the footprint of a vehicle. And the Administration is working on the first attempt at a coordinated energy policy since the Carter administration.
“The government’s now a part owner and it’s going to discover they need to give consumers a reason to buy (small, high-mileage) cars,” stressed Hall.
And as a major stakeholder worried about recovering billions of dollars in loans to Chrysler (and probably, General Motors), the government will have to not only consider ways to push for higher fuel economy, but find ways to get consumers to actually want to buy new, more efficient vehicles.
The question is whether the White House, or Congress, have the will to take the necessary steps, perhaps the carrot of big tax breaks, or the stick of high, European-style fuel taxes.
The bailout of Chrysler has come surprisingly quickly. It’s been less than six months since the automaker (and GM) began sounding alarms and discussing the prospect of federal aid. If President Obama is right, the bankruptcy process will be quick, as well.
The question, says analyst Joe Phillippi, of AutoTrends Consulting, is “just how soon help can arrive” from Fiat, in the form of new products. There’s frequent talk of adding a Chrysler version of the Fiat 500, but insiders warn that homologating the minicar to American safety standards would take two to three years, and the same is likely true for most other products sold in Europe by Fiat and its Lancia and Alfa Romeo divisions.
Until then, Chrysler will have to find ways to get by with what it has. The good news is that it recently unveiled a substantial update of its Jeep Grand Cherokee. And the automaker is readying an all-new version of its once-popular 300 sedan, which will go on sale next year.
And that leads to the real issue Chrysler will have to face in its bid for a turnaround. It needs win over reluctant consumers. The automaker has been stung by an assortment of mistakes, in recent years: from poorly conceived and executed products – such as the dead-on-arrival Chrysler Sebring – to nagging quality and reliability issues.
Complicating matters, many potential buyers have been steering clear, worrying about purchasing a product from a company that might go out of business at any moment. Even the creation of a nationalized warranty program, ensuring coverage should either GM or Chrysler go out of business hasn’t helped.
Americans love turnaround stories. Indeed, there was a surge of support – translating into strong sales – when Chrysler made it through its last brush with bankruptcy. But buyers have far more options, now, and the once-successful “Buy America” pitch all but backfires today. So even the White House can’t guarantee jaded buyers, in places like Southern California or suburban New York City, will put a Chrysler, Dodge or Jeep back on their shopping lists.